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April 1, 2009

Banks must exploit synergies between anti-fraud and anti-money laundering

According to new Datamonitor research, the current economic crisis is only serving to exacerbate existing technology issues. This threatens to lead to a new wave of financial mis-statements, account manipulations or even internal fraud. Despite squeezed budgets, banks must streamline their prevention technologies, as reduced vigilance could create new openings for money launderers and fraudsters.

By CBR Staff Writer

Financial crime is no longer simply about the laundering or theft of money. It is about high profile issues such as customer data theft and financial misreporting. The extremely severe conditions within the global financial services industry, with many banks teetering on the brink, have given rise to a twofold problem for the banking industry. The economic environment could increase the risk of potential internal fraud or suspicious behavior originating from outside of the institution. Furthermore, cost-cutting pressures may affect anti-money laundering (AML)/anti-fraud departments, with some banks already announcing budget and staff reductions.

The growing adoption of a risk-based approach to counter financial crime issues is driving the use of technology to implement advanced deviation detection capabilities and risk measurement techniques. While the major focus had been on automation, it has now shifted towards accuracy. Of the 194 banks that Datamonitor surveyed globally, 64% indicated that currently the top investment priority is technology that provides effective monitoring and detection capabilities with high alert accuracy. All of these abilities enable banks to move from a reactive stance to a more proactive approach by focusing human resources to deal with the highest risk cases.

Since the emergence of the first significant wave of financial crime detection and prevention programs, costs have far exceeded expectations. Besides the technology expenditure, the total cost of experienced technical and non-technical compliance and anti-fraud experts has significantly increased. The cost is quite often spread over many different business functions, such as operations, compliance, risk and security. It may also overlap with processes that are embedded in regular business practices, such as payment processing or credit risk analysis. As such, banks may be unable to hold a single unified view of all the associated costs related to AML or anti-fraud activities, preventing them from making efficient decisions regarding how best to direct their resources to focus on the major areas at risk of financial crime.

Thus, as financial crime grows, there is anecdotal evidence that banks are increasingly combining their compliance, fraud, and security departments into one single unit to take care of similar risk areas. Datamonitor expects this approach will result in an emerging trend of standardizing business processes and technologies to create an enterprise-wide view of compliance and fraud risk within an institution or across business lines, which can be viewed on management dashboards to keep track of various risks across the enterprise.

Given these trends, there is a growing opportunity for business and technology consultants or vendors that can improve a bank’s understanding of the full range of anti-financial crime-related processes which exist across the entire organization, and further implement all of the necessary enhancements to the existing process. However, with the purchaser’s greatest concern being the ability to acquire a solution that provides high alert accuracy, technology vendors need to focus on providing numeric proof (or if possible benchmarking studies) to their potential clients which demonstrate the reliability of their solutions.

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